Fed is Predicted to Deliver Three Quarter-Point Rate Cuts This Year

• The U.S. Federal Reserve is expected to cut interest rates by 25 basis points at each of the remaining three meetings of 2024, one more reduction than predicted last month, according to a slim majority of economists polled by Reuters who said a recession is unlikely.
• Over a third, 34 of the economists polled, predicted two rate cuts this year, while eleven expected the Fed to cut rates by 100 basis points (bps) or more.
• The higher rate cut expectations follow a weaker-than-expected July U.S. jobs report, which encouraged interest rate futures traders to price in as much as 120 bps of reductions in 2024 earlier this month. That pricing has reduced to roughly 100 bps now.
• Investors also said an abrupt market sell-off was also a driver of aggressive rate cut calls, related to the unwinding of large leveraged positions as a result of a sudden, sharp rise in the Japanese yen.
• Although some Fed officials have hinted rate cuts are coming, most economists in the Aug. 14-19 Reuters poll were not expecting a rapid series of rate cuts. Recent data, including last week's strong retail sales report, suggests the economy is performing relatively well even as inflation recedes.
• The unemployment rate is forecast to remain at around the current 4.3% through 2026, while Inflation is forecast to ease only slightly over the coming two years, according to the median forecasts in the poll. All measures of inflation polled - the Consumer Price Index, core CPI, personal consumption expenditures price index and core PCE - are expected to stay above 2% until at least 2026. Despite recent easing, wage growth has remained above the 3.0%-3.5% range seen as consistent with the Fed's 2% inflation target.
• The Fed was expected to deliver a 25 basis point cut each in the four quarters of 2025. Markets are currently pricing around 200 basis points of reductions by end-Q3 2025.

(Source: Reuters)